The buy-to-let market will increasingly shift away from larger lenders towards smaller players that offer limited company options as the reality of tax changes introduced last week starts to bite, experts say.
Last week saw the beginning of a gradual phasing-out of landlords’ ability to offset mortgage interest against tax, which will see interest relief fall by 25 per cent a year until 2020.
Landlords borrowing through limited companies can avoid the changes, instead paying corporation tax and potentially saving money.
The BTL market has already seen a shift with landlords choosing to set up limited companies. Last week Mortgages for Business research showed that 77 per cent of all BTL purchase applications had been made through limited companies in Q1 2017. The firm says limited companies made up 30 per cent of remortgage completions in Q1, up from 15 per cent in Q4.
But the number of lenders offering limited company BTL remains low. The most recent Moneyfacts data (see below), for the end of March, shows that 14 lenders provided the option out of 77 that offered any form of BTL.
Current limited company lenders are Aldermore, Axis Bank, Buckinghamshire Building Society, Danske Bank, Family Building Society, Fleet Mortgages, Foundation Home Loans, InterBay, Kent Reliance, Mercantile Trust, Metro Bank, Paragon Mortgages, Precise Mortgages and Vida Homeloans. The data shows that these 14 lenders have drastically scaled up the number of products they offer. In March there were 288 limited company BTL products on the market, up 41 per cent month-on-month and up 136 per cent annually.
By contract, the total number of BTL products on the market at the end of March was 1,502, up just 6 per cent month-on-month and 14 per cent year-on-year.
BTL experts say the smaller lenders will continue to gain ground. Brightstar director of commercial & development finance Robert Collins says: “The big guys like BM Solutions and The Mortgage Works are losing business at the moment, but the specialists are picking it up.”
Paragon Mortgages managing director John Heron thinks current limited company lenders also have capacity to meet demand. He says: “There is enough lending capacity for these customers, but whether the market is as competitive as customers would like it to be is a different point.”
Mortgages for Business managing director David Whittaker says: “Landlords continue to change their behaviour over time, not overnight. So while the market as a whole will welcome one of the big boys getting there, in the short term it suits the specialists to welcome the extra business.”
OneSavings Bank sales and marketing director John Eastgate says: “The likelihood of lenders not already in that space entering in the near term is pretty small.”
He adds that lenders will also be challenged by the Bank of England’s new affordability rules for portfolio landlords in October.
He says: “I think the prospects for the lenders who have the specialist capabilities already are pretty good. Specialist will become the new mainstream.”